UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September March 31, 2030, 201920
OR
[ ]☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from Not Applicable to Not Applicable
Commission file number: 000-000147
Crawford United CorporationCRAWFORD UNITED CORPORATION
(Exact Namename of Registrantregistrant as Specifiedspecified in Charter)
its charter)
Ohio |
| 34-0288470 |
(State or other jurisdiction of | (
|
Identification No.) |
10514 Dupont Avenue, Suite 200,Cleveland, Ohio | 44108 |
(Address of | (Zip Code) |
(216) 541-8060
(Registrant’sRegistrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None.(216) 243-2614
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]☐ No [X]☒
Securities registered pursuant to Section 12(b) of the Act: None.
As of October 31, 2019, 2,162,806April 30, 2020, 2,539,629 shares of Class A Common Stock and 696,848771,848 shares of Class B Common Stock were outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
CRAWFORD UNITED CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) | (Unaudited) | |||||||||||||||
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and cash equivalents | $ | 3,250,087 | $ | 5,057,626 | ||||||||||||
Cash and Cash Equivalents | $ | 5,418,534 | $ | 2,232,499 | ||||||||||||
Accounts receivable less allowance for doubtful accounts | 13,151,459 | 9,835,262 | 12,716,637 | 14,001,795 | ||||||||||||
Costs and estimated earnings in excess of billing | 2,609,373 | 2,083,349 | ||||||||||||||
Inventories less allowance for obsolete inventory | 7,099,673 | 5,497,982 | ||||||||||||||
Contract assets | 4,197,918 | 2,422,379 | ||||||||||||||
Inventories-less allowance for obsolete inventory | 10,936,788 | 7,678,690 | ||||||||||||||
Prepaid expenses and other current assets | 631,967 | 818,609 | 795,907 | 703,002 | ||||||||||||
Total Current Assets | 26,742,559 | 23,292,828 | 34,065,784 | 27,038,365 | ||||||||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||||||||||
Land and improvements | 228,872 | 257,205 | 228,872 | 228,872 | ||||||||||||
Buildings and leasehold improvements | 1,837,721 | 1,709,165 | 1,890,494 | 1,837,009 | ||||||||||||
Machinery and equipment | 13,834,588 | 13,343,878 | 14,049,260 | 13,950,444 | ||||||||||||
Total property, plant and equipment | 15,901,181 | 15,310,248 | 16,168,626 | 16,016,325 | ||||||||||||
Less accumulated depreciation | 3,189,009 | 2,006,133 | 4,056,837 | 3,622,153 | ||||||||||||
Property, Plant and Equipment, Net | 12,712,172 | 13,304,115 | 12,111,789 | 12,394,172 | ||||||||||||
Operating right of use assets, net | 9,448,909 | - | ||||||||||||||
Operating Right of Use Asset, Net | 9,007,314 | 9,224,840 | ||||||||||||||
OTHER ASSETS: | ||||||||||||||||
Goodwill | 9,792,670 | 9,582,202 | 11,425,853 | 9,791,745 | ||||||||||||
Intangibles, net of accumulated amortization | 4,051,428 | 4,332,202 | 8,171,498 | 3,950,838 | ||||||||||||
Other non-current assets | 88,046 | 95,263 | 106,637 | 88,046 | ||||||||||||
Total Non-Current Other Assets | 13,932,144 | 14,009,667 | 19,703,988 | 13,830,629 | ||||||||||||
Total Assets | $ | 62,835,784 | $ | 50,606,610 | $ | 74,888,875 | $ | 62,488,006 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) | (Unaudited) | |||||||||||||||
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Convertible notes payable | $ | 200,000 | $ | 200,000 | ||||||||||||
Notes payable | 2,742,760 | 1,555,663 | ||||||||||||||
Bank debt | 1,333,333 | 1,333,333 | ||||||||||||||
Leases payable | 959,808 | 13,800 | ||||||||||||||
Notes payable – current | 2,752,449 | 2,749,459 | ||||||||||||||
Bank debt – current | 1,333,333 | 1,333,333 | ||||||||||||||
Leases payable - current | 727,961 | 850,664 | ||||||||||||||
Accounts payable | 6,612,817 | 5,169,819 | 8,783,148 | 6,071,522 | ||||||||||||
Unearned revenue | 1,884,218 | 5,257,797 | 1,451,613 | 1,998,578 | ||||||||||||
Accrued payroll and related expenses | 1,077,546 | 1,358,669 | ||||||||||||||
Accrued expenses | 2,519,444 | 1,606,429 | 4,514,338 | 3,281,445 | ||||||||||||
Accrued income taxes | 662,327 | 360,239 | ||||||||||||||
Total Current Liabilities | 17,992,253 | 16,855,749 | 19,562,842 | 16,285,001 | ||||||||||||
LONG-TERM LIABILITIES: | ||||||||||||||||
Notes payable | 8,366,237 | 11,086,402 | ||||||||||||||
Bank debt | 7,241,356 | 8,194,679 | ||||||||||||||
Notes payable – long-term | 6,988,987 | 7,676,697 | ||||||||||||||
Bank debt – long-term | 14,163,181 | 6,376,594 | ||||||||||||||
Deferred income taxes | 1,701,651 | 1,701,653 | 2,207,734 | 2,207,734 | ||||||||||||
Leases payable | 8,617,781 | 2,642 | ||||||||||||||
Leases payable – long term | 8,425,563 | 8,513,448 | ||||||||||||||
Total Long-Term Liabilities | 25,927,025 | 20,985,376 | 31,785,465 | 24,774,473 | ||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||
Preferred shares, no par value - 1,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||||||||||
Common shares, no par value | - | - | ||||||||||||||
Class A common shares - 10,000,000 shares authorized, 2,162,806 and 2,161,014 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 2,945,642 | 2,641,300 | ||||||||||||||
Class B common shares - 2,500,000 shares authorized, 696,848 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 1,358,272 | 710,272 | ||||||||||||||
Class A common shares - 10,000,000 shares authorized, 2,576,837 shares issued at March 31, 2020 and December 31, 2019, respectively | 3,636,272 | 3,599,806 | ||||||||||||||
Class B common shares - 2,500,000 shares authorized, 954,283 shares issued at March 31, 2020 and December 31, 2019, respectively | 1,465,522 | 1,465,522 | ||||||||||||||
Contributed capital | 1,741,901 | 1,741,901 | 1,741,901 | 1,741,901 | ||||||||||||
Treasury shares | (1,905,780 | ) | (1,905,780 | ) | (1,905,780 | ) | (1,905,780 | ) | ||||||||
Class A common shares - 37,208 shares held at September 30, 2019 and December 31, 2018 | ||||||||||||||||
Class B common shares – 182,435 shares held at September 30, 2019 and December 31, 2018 | ||||||||||||||||
Class A common shares - 37,208 shares held at March 31, 2020 and December 31, 2019 | ||||||||||||||||
Class B common shares – 182,435 shares held at March 31, 2020 and December 31, 2019 | ||||||||||||||||
Retained earnings | 14,776,471 | 9,577,792 | 18,602,653 | 16,527,083 | ||||||||||||
Total Stockholders' Equity | 18,916,506 | 12,765,485 | 23,540,568 | 21,428,532 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 62,835,784 | $ | 50,606,610 | $ | 74,888,875 | $ | 62,488,006 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Total Sales | $ | 22,244,681 | $ | 19,771,137 | $ | 68,595,404 | $ | 45,243,029 | $ | 25,281,574 | $ | 21,836,087 | ||||||||||||
Cost of Sales | 17,257,118 | 15,320,915 | 53,551,020 | 34,287,788 | 19,073,431 | 17,006,199 | ||||||||||||||||||
Gross Profit | 4,987,563 | 4,450,222 | 15,044,384 | 10,955,241 | 6,208,143 | 4,829,888 | ||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||
Product development costs | - | - | - | 220,418 | ||||||||||||||||||||
Selling, general and administrative expenses | 2,428,784 | 1,978,943 | 7,122,981 | 5,803,514 | ||||||||||||||||||||
Selling, General and administrative expenses | 3,069,994 | 2,258,817 | ||||||||||||||||||||||
Operating Income | 2,558,779 | 2,471,279 | 7,921,403 | 4,931,309 | 3,138,149 | 2,571,071 | ||||||||||||||||||
Other (Income) and Expenses: | ||||||||||||||||||||||||
Interest charges | 321,994 | 286,684 | 872,646 | 453,372 | 297,421 | 266,073 | ||||||||||||||||||
Loss on sale of business | - | - | - | 1,160,574 | ||||||||||||||||||||
Other (income) expense, net | 3 | 97,412 | 1,664 | 205,678 | 71,361 | (23,874 | ) | |||||||||||||||||
Total Other (Income) and Expenses | 321,997 | 384,096 | 874,310 | 1,819,624 | 368,782 | 242,199 | ||||||||||||||||||
Income before Provision for Income Taxes | 2,236,782 | 2,087,183 | 7,047,093 | 3,111,685 | 2,769,367 | 2,328,872 | ||||||||||||||||||
Provision for Income Taxes | 541,914 | 590,104 | 1,775,288 | 846,229 | 693,797 | 583,414 | ||||||||||||||||||
Net Income | $ | 1,694,868 | $ | 1,497,079 | $ | 5,271,805 | $ | 2,265,456 | $ | 2,075,570 | $ | 1,745,458 | ||||||||||||
Net Income Per Common Share - Basic | $ | 0.59 | $ | 0.55 | $ | 1.89 | $ | 0.80 | $ | 0.63 | $ | 0.63 | ||||||||||||
Net Income Per Common Share - Diluted | $ | 0.52 | $ | 0.48 | $ | 1.64 | $ | 0.71 | $ | 0.63 | $ | 0.55 | ||||||||||||
Weighted Average Shares of Common Stock Outstanding | ||||||||||||||||||||||||
Basic | 2,850,958 | 2,720,654 | 2,787,845 | 2,826,347 | 3,311,477 | 2,755,265 | ||||||||||||||||||
Diluted | 3,249,233 | 3,092,520 | 3,223,004 | 3,186,946 | 3,313,157 | 3,178,420 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
COMMON SHARES - NO PAR VALUE | ||||||||||||||||||||||||
CLASS A | CLASS B | CONTRIBUTED CAPITAL | TREASURY SHARES | RETAINED EARNINGS | TOTAL | |||||||||||||||||||
Balance at June 30, 2018 | $ | 2,495,534 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 6,732,459 | $ | 9,774,386 | |||||||||||
Share-based compensation expense | 13,000 | - | - | - | - | 13,000 | ||||||||||||||||||
Net Income | - | - | - | - | 1,497,079 | 1,497,079 | ||||||||||||||||||
Balance at September 30, 2018 | $ | 2,508,534 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 8,229,538 | $ | 11,284,465 |
COMMON SHARES - NO PAR VALUE | ||||||||||||||||||||||||
CLASS A | CLASS B | CONTRIBUTED CAPITAL | TREASURY SHARES | RETAINED EARNINGS | TOTAL | |||||||||||||||||||
Balance at June 30, 2019 | $ | 2,907,342 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 13,081,603 | $ | 16,535,338 | |||||||||||
Share-based compensation expense | 38,300 | - | - | - | - | 38,300 | ||||||||||||||||||
Note conversion | - | 648,000 | - | - | - | 648,000 | ||||||||||||||||||
Net Income | - | - | - | - | 1,694,868 | 1,694,868 | ||||||||||||||||||
Balance at September 30, 2019 | $ | 2,945,642 | $ | 1,358,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 14,776,471 | $ | 18,916,506 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
COMMON SHARES - NO PAR VALUE | ||||||||||||||||||||||||
CLASS A | CLASS B | CONTRIBUTED CAPITAL | TREASURY SHARES | RETAINED EARNINGS | TOTAL | |||||||||||||||||||
Balance at December 31, 2017 | $ | 2,246,367 | $ | 710,272 | $ | 1,741,901 | $ | (264,841 | ) | $ | 5,964,082 | $ | 10,397,781 | |||||||||||
Share-based compensation expense | 262,167 | - | - | - | - | 262,167 | ||||||||||||||||||
Proceeds from sale of business | - | - | - | (1,640,939 | ) | - | (1,640,939 | ) | ||||||||||||||||
Net Income | - | - | - | - | 2,265,456 | 2,265,456 | ||||||||||||||||||
Balance at September 30, 2018 | $ | 2,508,534 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 8,229,538 | $ | 11,284,465 |
COMMON SHARES - NO PAR VALUE | ||||||||||||||||||||||||
CLASS A | CLASS B | CONTRIBUTED CAPITAL | TREASURY SHARES | RETAINED EARNINGS | TOTAL | |||||||||||||||||||
Balance at December 31, 2018 | $ | 2,641,300 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 9,577,792 | $ | 12,765,485 | |||||||||||
Share-based compensation expense | 348,877 | - | - | - | - | 348,877 | ||||||||||||||||||
Warrant exercise | 250,000 | - | - | - | - | 250,000 | ||||||||||||||||||
Note conversion | 359,629 | 755,250 | - | - | - | 1,114,879 | ||||||||||||||||||
Cumulative effect of accounting change related to lease standard | - | - | - | - | (30,572 | ) | (30,572 | ) | ||||||||||||||||
Net Income | - | - | - | - | 6,979,863 | 6,979,863 | ||||||||||||||||||
Balance at December 31, 2019 | $ | 3,599,806 | $ | 1,465,522 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 16,527,083 | $ | 21,428,532 | |||||||||||
Share-based compensation expense | 36,466 | - | - | - | - | 36,466 | ||||||||||||||||||
Net Income | - | - | - | - | 2,075,570 | 2,075,570 | ||||||||||||||||||
Balance at March 31, 2020 | $ | 3,636,272 | $ | 1,465,522 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 18,602,653 | $ | 23,540,568 |
COMMON SHARES - NO PAR VALUE | ||||||||||||||||||||||||
CLASS A | CLASS B | CONTRIBUTED CAPITAL | TREASURY SHARES | RETAINED EARNINGS | TOTAL | |||||||||||||||||||
Balance at December 31, 2018 | $ | 2,641,300 | $ | 710,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 9,577,792 | $ | 12,765,485 | |||||||||||
Share-based compensation expense | 304,342 | - | - | - | - | 304,342 | ||||||||||||||||||
Note conversion | - | 648,000 | - | - | - | 648,000 | ||||||||||||||||||
Cumulative effect of accounting change | - | - | - | - | (73,126 | ) | (73,126 | ) | ||||||||||||||||
Net Income | - | - | - | - | 5,271,805 | 5,271,805 | ||||||||||||||||||
Balance at September 30, 2019 | $ | 2,945,642 | $ | 1,358,272 | $ | 1,741,901 | $ | (1,905,780 | ) | $ | 14,776,471 | $ | 18,916,506 |
COMMON SHARES ISSUED | TREASURY SHARES | COMMON SHARES OUTSTANDING | ||||||||||||||||||||||
CLASS A | CLASS B | CLASS A | CLASS B | CLASS A | CLASS B | |||||||||||||||||||
Balance at December 31, 2018 | 2,161,014 | 779,283 | 37,208 | 182,435 | 2,123,806 | 596,848 | ||||||||||||||||||
Stock Awards | 64,334 | - | - | - | 64,334 | - | ||||||||||||||||||
Warrant exercise | 100,000 | - | - | - | 100,000 | - | ||||||||||||||||||
Note conversion | 251,489 | 175,000 | - | - | 251,489 | 175,000 | ||||||||||||||||||
Balance at December 31, 2019 | 2,576,837 | 954,283 | 37,208 | 182,435 | 2,539,629 | 771,848 | ||||||||||||||||||
Stock Awards | - | - | - | - | - | - | ||||||||||||||||||
Warrant exercise | - | - | - | - | - | - | ||||||||||||||||||
Note conversion | - | - | - | - | - | - | ||||||||||||||||||
Balance at March 31, 2020 | 2,576,837 | 954,283 | 37,208 | 182,435 | 2,539,629 | 771,848 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||
Net Income | $ | 5,271,805 | $ | 2,265,456 | $ | 2,075,570 | $ | 1,745,458 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 1,482,784 | 1,122,061 | 623,465 | 494,192 | ||||||||||||
Loss (gain) on sale of operations | - | 1,160,574 | ||||||||||||||
Loss (gain) on disposal of assets | 4,294 | 10,750 | ||||||||||||||
Non-cash share-based compensation expense | 304,342 | 262,167 | 36,466 | 223,859 | ||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Decrease (Increase) in accounts receivable | (3,314,197 | ) | (2,555,058 | ) | 2,056,246 | (1,332,723 | ) | |||||||||
Decrease (Increase) in inventories | (1,601,691 | ) | (1,325,790 | ) | (339,843 | ) | 162,988 | |||||||||
Decrease (Increase) in costs and estimated earnings in excess of billings | (526,024 | ) | (219,723 | ) | ||||||||||||
Decrease (Increase) in contract assets | (1,775,539 | ) | (398,283 | ) | ||||||||||||
Decrease (Increase) in prepaid expenses & other assets | 196,359 | (387,039 | ) | (58,099 | ) | 51,144 | ||||||||||
Increase (Decrease) in accounts payable | 1,288,002 | 1,400,608 | 2,305,197 | (927,360 | ) | |||||||||||
Increase (Decrease) in accrued payroll and related expenses | (281,123 | ) | 391,161 | |||||||||||||
Increase (Decrease) in accrued expenses | 987,717 | (253,853 | ) | 1,239,831 | 962,492 | |||||||||||
Increase (Decrease) in accrued income taxes | 302,088 | 602,881 | ||||||||||||||
Increase (Decrease) in unearned revenue | (3,383,550 | ) | 3,783,124 | (546,965 | ) | (2,285,385 | ) | |||||||||
Total adjustments | (4,540,999 | ) | 3,991,863 | 3,540,759 | (3,049,076 | ) | ||||||||||
Net Cash Provided by Operating Activities | 730,806 | 6,257,319 | ||||||||||||||
Net Cash Provided (Used) by Operating Activities | $ | 5,616,329 | $ | (1,303,618 | ) | |||||||||||
Cash Flows from Investing Activities | ||||||||||||||||
Cash paid for acquisition | (9,400,000 | ) | - | |||||||||||||
Capital expenditures | (595,227 | ) | (274,556 | ) | (122,720 | ) | (323,447 | ) | ||||||||
Cash paid for acquisition | (50,001 | ) | (20,209,583 | ) | ||||||||||||
Net Cash Used in Investing Activities | (645,228 | ) | (20,484,139 | ) | ||||||||||||
Net Cash (Used in) Investing Activities | $ | (9,522,720 | ) | $ | (323,447 | ) | ||||||||||
Cash Flows from Financing Activities | ||||||||||||||||
Payments on notes | (909,457 | ) | (258,870 | ) | (684,720 | ) | (105,175 | ) | ||||||||
Payments on bank debt | (2,870,999 | ) | (6,863,889 | ) | (3,093,747 | ) | (1,083,334 | ) | ||||||||
Borrowings on seller note | - | 9,000,000 | ||||||||||||||
Borrowings on bank debt | 1,898,542 | 13,824,690 | 10,870,893 | 451,716 | ||||||||||||
Payments on capital lease | (11,203 | ) | (27,529 | ) | ||||||||||||
Payments on finance lease | - | (1,639 | ) | |||||||||||||
Net Cash Provided by (Used in) Financing Activities | (1,893,117 | ) | 15,674,402 | $ | 7,092,426 | $ | (738,432 | ) | ||||||||
Net Increase (decrease) in cash and cash equivalents | (1,807,539 | ) | 1,447,582 | 3,186,035 | (2,365,497 | ) | ||||||||||
Cash and cash equivalents at beginning of year | 5,057,626 | 2,444,110 | ||||||||||||||
Cash and cash equivalents at beginning of period | 2,232,499 | 5,057,626 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 3,250,087 | $ | 3,891,692 | $ | 5,418,534 | $ | 2,692,129 | ||||||||
Supplemental disclosures of cash flow information | ||||||||||||||||
Interest paid | $ | 884,103 | $ | 493,527 | ||||||||||||
Income taxes paid | $ | 1,507,700 | $ | 130,745 | ||||||||||||
Non-cash proceeds received for Class A and Class B Common Shares in exchange for the sale of certain assets | $ | - | $ | 1,640,939 | ||||||||||||
Note conversion | $ | 648,000 | $ | - | ||||||||||||
Interest Paid | $ | 255,742 | $ | 190,462 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)SeptemberMARCH 31, 20 30, 201920
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of Crawford United Corporation and its wholly-owned subsidiaries (the “Company”). Significant intercompany transactions and balances have been eliminated in the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2019March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2019.2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.
During the three and nine monthsthree-month period ended September 30, 2019,March 31, 2020, there werehave been no changes to our significant accounting policies other than the adoption of the new standard for leases, as discussed in Note 2 below.policies.
Reclassifications
Certain prior year amounts were reclassified to conform to the current year presentation.presentation, including transaction costs related to acquisitions that were reclassified from selling, general and administrative to other (income) expenses as these costs are not considered as operating costs. These reclassifications have no effect on the financial position or results of operations reported as of and for the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s Summary of Significant Accounting Policies is provided with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.
Recently Adopted Accounting StandardsThe Company did not incur any material impact to its results of operations due to the adoption of any new accounting standards during the periods reported. The adoption of the new standard for leases did have a material impact on consolidated balance sheets as disclosed below and in Note 9.
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842),” a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of initial application. The new standard is effective for fiscal years and interim periods within those years, beginning on or after December 15, 2018, with early adoption permitted. The adoption of this new standard on January 1, 2019 resulted in assets of $9.7 million recorded as Operating Right of Use Assets, net, and additional lease liabilities of $9.8 million. The Company also recorded an adjustment to retained earnings resulting from the cumulative effect of the change in accounting of ($0.1) million. See Note 9 for further information.
Recently Issued Accounting Standards
In January 2017, FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-04 eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard, which should be applied prospectively, is effective for fiscal years and interim periods within those years beginning on or after December 15, 2019. Early adoption is permitted. We are evaluating the impact theThe adoption of this standard coulddid not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The standard requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly-recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2019 with early adoption permitted. We are evaluating the impact theThe adoption of this standard coulddid not have a material impact on our consolidated financial statements.
3. ACCOUNTS RECEIVABLE
The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The reserve for doubtful accounts was $17,625$18,783 and $35,000$18,325 at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
4. INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or net realizable value and consists of:
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
Raw materials and component parts | $ | 3,082,312 | $ | 2,313,664 | $ | 2,923,247 | $ | 2,945,427 | ||||||||
Work-in-process | 2,180,458 | 1,209,117 | 3,367,632 | 2,800,699 | ||||||||||||
Finished products | 2,158,350 | 2,201,693 | 4,876,415 | 2,183,170 | ||||||||||||
Total inventory | 7,421,120 | 5,724,474 | $ | 11,167,294 | 7,929,296 | |||||||||||
Less: inventory reserves | 321,447 | 226,492 | 230,506 | 250,606 | ||||||||||||
Net inventory | $ | 7,099,673 | $ | 5,497,982 | $ | 10,936,788 | $ | 7,678,690 |
5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Intangible assets relate to the purchase of businesses. Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is not amortized but is reviewed on an annual basis for impairment. Amortization of intangible assetsintangibles is being amortized on a straight-line basis over period ranging from 1one year to 15 years. Intangible assets are as follows:
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
Customer list intangibles | $ | 4,970,000 | $ | 4,970,000 | $ | 7,670,000 | $ | 4,970,000 | ||||||||
Non-compete agreements | 200,000 | 200,000 | 200,000 | 200,000 | ||||||||||||
Trademarks | 340,000 | 340,000 | 2,040,000 | 340,000 | ||||||||||||
Total intangible assets | 5,510,000 | 5,510,000 | 9,910,000 | 5,510,000 | ||||||||||||
Less: accumulated amortization | 1,458,572 | 1,177,798 | 1,738,502 | 1,559,162 | ||||||||||||
Intangible assets, net | $ | 4,051,428 | $ | 4,332,202 | $ | 8,171,498 | $ | 3,950,838 |
Amortization of intangibles assets was $93,592was: $179,340 and $93,591 for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and $280,774 and $470,606 for the nine months ended September 30, 2019 and 2018, respectively.
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are recorded at cost and depreciated over their useful lives. Maintenance and repair costs are expenses as incurred. Property, plant and equipment are as follows:
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
Land | $ | 228,872 | $ | 257,205 | $ | 228,872 | $ | 228,872 | ||||||||
Buildings and improvements | 1,837,721 | 1,709,165 | 1,890,494 | 1,837,009 | ||||||||||||
Machinery & equipment | 13,834,588 | 13,343,878 | 14,049,260 | 13,950,444 | ||||||||||||
Total property, plant & equipment | 15,901,181 | 15,310,248 | 16,168,626 | 16,016,325 | ||||||||||||
Less: accumulated depreciation | 3,189,009 | 2,006,133 | 4,056,837 | 3,622,153 | ||||||||||||
Property plant & equipment, net | $ | 12,712,172 | $ | 13,304,115 | $ | 12,111,789 | $ | 12,394,172 |
Depreciation expense was $378,111$434,684 and $379,495$400,601 for the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and was $1,182,876 and $651,455 for the nine months ended September 30, 2019 and 2018, respectively.
7. BANK DEBT
The Company entered into a Credit Agreement on June 1, 2017 with JPMorgan Chase Bank, N.A. as lender, which was subsequently amended in connection with funding the acquisition of CAD Enterprises, Inc. (“CAD”) on July 5, 2018 (as amended, the “Credit Agreement”). As amended, the Credit Agreement is comprised of a revolving facility in the amount of $12,000,000, subject to a borrowing base (determined based on 80% of Eligible Accounts, plus 50% of Eligible Progress Billing Accounts, plus 50% of Eligible Inventory, minus Reserves, each as defined in the Credit Agreement) and a term A loan in the amount of $6,000,000. Outstanding borrowings on the term A loan are payable in consecutive monthly installments, which currently amount to $111,111 per month. The Credit Agreement was amended on September 30, 2019 to expand the revolving loan amount from $12,000,000 to $20,000,000, subject to a borrowing base, and to extend the maturity of revolving facility was extended from June 1, 2021 to June 1, 2024. The Credit Agreement was further amended on December 30, 2019 to eliminate the borrowing base.
The revolving facility under the Credit Agreement includes a $3 million sublimit for the issuance of letters of credit thereunder. The Credit Agreement also provides for a separate credit line for borrowings of up to an aggregate of $1,000,000 for capital expenditures until July 5, 2019, at which time any outstanding capital expenditure borrowings will be converted into a term loan maturing at the earlier of five years after such conversion or the termination of the revolving credit facility. Interest for borrowings under the revolving facility accrues at a per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) (0.25%) for Prime Rate loans and (ii) 1.75% for LIBOR loans. The maturity date of the revolving facility is June 1, 2024. Interest for borrowings under the term A loan accrues at a per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) 0.25% for Prime Rate loans and (ii) 2.25% for LIBOR loans. The maturity date of the term A loan is December 1, 2022. The Credit Agreement includes a commitment fee on the unused portion of the revolving facility of 0.25% per annum payable quarterly. The obligations of the Company and other borrowers under the Credit Agreement are secured by a blanket lien on all the assets of the Company and its subsidiaries. The Credit Agreement also includes customary representations and warranties and applicable reporting requirements and covenants. The financial covenants under the Credit Agreement include a minimum fixed charge coverage ratio, a maximum senior funded debt to EBITDA ratio and a maximum total funded debt to EBITDA ratio.
Bank debt balances consist of the following:
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
Term debt | $ | 4,444,444 | $ | 5,444,444 | $ | 3,777,778 | $ | 4,111,111 | ||||||||
Revolving debt | 4,211,703 | 4,184,158 | 11,843,888 | 3,722,995 | ||||||||||||
Total Bank debt | 8,656,147 | 9,628,602 | 15,621,666 | 7,834,106 | ||||||||||||
Less: current portion | 1,333,333 | 1,333,333 | 1,333,333 | 1,333,333 | ||||||||||||
Non-current bank debt | 7,322,814 | 8,295,269 | 14,288,333 | 6,500,773 | ||||||||||||
Less: unamortized debt costs | 81,458 | 100,590 | 125,153 | 124,179 | ||||||||||||
Net non-current bank debt | $ | 7,241,356 | $ | 8,194,679 | $ | 14,163,181 | $ | 6,376,594 |
The Company had $8.2 million and $16.3 million available to borrow on the revolving credit facility at March 31, 2020 and December 31, 2019, respectively.
8. NOTES PAYABLE
Convertible Notes Payable - Related Party
The Company converted all of the convertible notes payable in fiscal year 2019 and no longer is party to a Convertible Loan Agreement (as amended, “Convertible Loan”) with Roundball, LLC (“Roundball”). The Convertible Loan provides approximately $467,000any agreements of liquiditythis nature. Interest expense related to meet working capital requirements ofconvertible notes was $0 and $34 thousand for the Companythree months ended March 31, 2020 and allows $250,000 of borrowing on the agreement at the Company's discretion at an interest rate of 0.34%. Borrowings under the Convertible Loan mature on December 30, 2019. Roundball, a major shareholder of the Company, is an affiliate of Steven Rosen and Matthew Crawford, who serve on the Board of Directors of the Company.
The Convertible Loan provides Roundball with the option to elect to convert amounts outstanding under the Convertible Loan into Class A Common Shares at a conversion price of $1.43 per Class A Common Share. In December 2018, the Convertible Loan was amended to provide Roundball with the option to elect to convert, subject to shareholder approval which was obtained on May 10, 2019, a portion of the indebtedness into Class B Common Shares at a conversion price of $1.43 per Class B Common Share, up to a maximum amount of 75,000 Class B Common Shares. The outstanding principal balance on the Convertible Loan as of September 30, 2019 and December 31, 2018, respectively, was $200,000.
In connection with the Convertible Loan, the Company issued a warrant to Roundball to purchase, at Roundball’s option, up to 100,000 shares of Class A Common Stock of the Company at an exercise price of $2.50 per share, subject to certain anti-dilution and other adjustments. The warrant expires on December 30, 2019.respectively.
Notes Payable – Related Party
The Company has two separate outstanding promissory notes with First Francis Company Inc. (“First Francis”), which were originally issued in July 2016 in connection with the acquisition of Federal Hose Manufacturing (“Federal Hose”) and which were amended in July 2018 in connection with acquisition of CAD. The first promissory note was issued with original principal in the amount of $2,000,000, and the second was issued with original principal in the amount of $2,768,662. The promissory notes each have an interest rate of 6.25% per annum, which was increased from 4.0% per annum as part of the July 2018 amendments to the Credit Agreement. In addition, the promissory note with original principal amount of $2,768,662 was amended in July 2018 to provide for a conversion option commencing July 5, 2019 which allows First Francis to convert the promissory note, in whole in part with respect to a maximum amount of $648,000, into shares of the Company’s Class B common stock at the price of $6.48 per share (subject to adjustment), subject to shareholder approval which was obtained on May 10, 2019. On July 9, 2019, First Francis exercised its option to convert $648,000 of existing indebtedness into 100,000 Class B Common Shares of the Company. First Francis is owned by Matthew Crawford, who serves on the Board of Directors of the Company, and Edward Crawford, who served on the Board of Directors of the Company until June 17, 2019.
Notes Payable – Seller Note
Effective July 1, 2018, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of CAD. Upon the closing of the transaction, the CAD forshares were transferred and assigned to the Company in consideration of the payment by the Company of an aggregate purchase price of $21 million, $12 million of which was payable in cash at closing, with the remainder paid in the form of a subordinated promissory note issued by the Company in favor of a sellerSeller (the “Seller Note”)Note), which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Share Purchase Agreement entered into in connection with the acquisition (the “Share Purchase Agreement”). The Seller Note bears interest at a rate of four percent (4%) per annum and is payable in full no later than June 30, 2023 (the “Maturity Date”). The Maturity Date, with respect to any then-outstanding portion of the original principal amount which is subject to an indemnification claim by the Company (asserted in accordance with the terms of the Share Purchase Agreement) pending as of the date thereof, will be automatically extended until such time as any claim relating to such disputed amount is no longer pending, pursuant to the terms of the Seller Note and subject to additional conditions set forth therein and in the Share Purchase Agreement. The Company is not permitted to prepay any amounts due and owing under the Seller Note. Payment of the Seller Note is secured by a second-priority security interest in the assets of the Company.CAD. Interest accrued on the original principal amount becamebecomes due and payable in arrears beginning September 30, 2018, and subsequent interest is due on the first day of each calendar quarter thereafter up to and including the quarter ending SeptemberJune 30, 2019. The Company is required to make quarterly principal payments, the amount of which iswill be calculated based on a four (4) year amortization schedule, beginning on September 30, 2019 and continuing on the last day of each calendar quarter thereafter up to and including the Maturity Date.
Notes payable consists of the following:
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
In connection with the Federal Hose acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,000,000 loan due to First Francis Company, payable in quarterly installments. The remaining balance of the note shall be payable in full on July 1, 2022. | $ | 1,349,413 | $ | 1,485,061 | ||||||||||||
In connection with the Federal Hose acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,000,000 loan due to First Francis Company, payable in quarterly installments beginning October 31, 2016 | $ | 1,255,411 | $ | 1,302,776 | ||||||||||||
In connection with the Federal Hose acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,768,662 loan due to First Francis Company, payable in quarterly installments. The remaining balance of the note shall be payable in full on July 1, 2022. | 1,322,084 | 2,157,004 | ||||||||||||||
In connection with the Federal Hose acquisition, the Company entered into a promissory note on July 1, 2016 for a $2,768,662 loan due to First Francis Company, payable in quarterly installments beginning October 31, 2016. | 1,173,525 | 1,248,380 | ||||||||||||||
In connection with the CAD acquisition, the Company entered into a promissory note on July 1, 2018 for a $9,000,000 loan due to the Loudermilk’s, payable in quarterly installments. The first principal payment was made in the current quarter. | 8,437,500 | 9,000,000 | ||||||||||||||
In connection with the CAD acquisition, the Company entered into a promissory note on July 1, 2018 for a $9,000,000 loan due to the Loudermilks, payable in quarterly installments beginning September 30, 2018. | 7,312,500 | 7,875,000 | ||||||||||||||
Total notes payable | 11,108,997 | 12,642,065 | 9,741,436 | 10,426,156 | ||||||||||||
Less current portion | 2,742,760 | 1,555,663 | 2,752,449 | 2,749,459 | ||||||||||||
Notes payable – non-current portion | $ | 8,366,237 | $ | 11,086,402 | $ | 6,988,987 | $ | 7,676,697 |
9. LEASES
On January 1, 2019, the Company adopted ASU 2016-02 “Leases (Topic 842),” a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP.
The Company has operating and finance leases for facilities, vehicles and equipment. These leases have remaining terms of 2 years to 15 years, some of which include options to extended the leases for up to 10 years.
Supplemental balance sheet information related to leases:
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
Operating leases: | ||||||||||||||||
Operating lease right-of-use assets | $ | 9,448,909 | $ | - | ||||||||||||
Operating lease right-of-use assets, net | $ | 9,007,314 | $ | 9,224,840 | ||||||||||||
Other current liabilities | 959,808 | - | 727,961 | 850,664 | ||||||||||||
Operating lease liabilities | 8,617,781 | - | 8,425,563 | 8,513,448 | ||||||||||||
Total operating lease liabilities | $ | 9,577,589 | $ | - | $ | 9,153,524 | $ | 9,364,112 | ||||||||
Weighted Average Remaining Lease Term | ||||||||||||||||
Operating Leases (in years) | 11.2 | - | 11.0 | 11.0 | ||||||||||||
Weighted Average Discount Rate | ||||||||||||||||
Operating Leases | 5.0 | % | - | 5.0 | % | 5.0 | % |
10. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per share.
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Earnings Per Share - Basic | ||||||||||||||||||||||||
Net Income | $ | 1,694,868 | $ | 1,497,079 | $ | 5,271,805 | $ | 2,265,456 | $ | 2,075,570 | $ | 1,745,458 | ||||||||||||
Weighted average shares of common stock outstanding - Basic | 2,850,958 | 2,720,654 | 2,787,845 | 2,826,347 | 3,311,477 | 2,755,265 | ||||||||||||||||||
Earnings Per Share - Basic | $ | 0.59 | $ | 0.55 | $ | 1.89 | $ | 0.80 | $ | 0.63 | $ | 0.63 | ||||||||||||
Earnings Per Share - Diluted | ||||||||||||||||||||||||
Weighted average shares of common stock outstanding - Basic | 2,850,958 | 2,720,654 | 2,787,845 | 2,826,347 | 3,311,477 | 2,755,265 | ||||||||||||||||||
Warrants, Options and Convertible Notes | 398,275 | 371,866 | 435,159 | 360,599 | 1,680 | 423,155 | ||||||||||||||||||
Weighted average shares of common stock -Diluted | 3,249,233 | 3,092,520 | 3,223,004 | 3,186,946 | 3,313,157 | 3,178,420 | ||||||||||||||||||
Earnings Per Share - Diluted | $ | 0.52 | $ | 0.48 | $ | 1.64 | $ | 0.71 | $ | 0.63 | $ | 0.55 |
11. ACQUISITIONS
Effective July 1, 2018,January 2, 2020, the Company completed the acquisition of substantially all of the issued and outstanding sharesassets of capital stock of CAD,MPI Products, Inc. (dba Marine Products International) (“MPI”), pursuant to the ShareAsset Purchase Agreement.Agreement entered into by and between Crawford United Acquisition Company LLC, an Ohio limited liability company and wholly-owned subsidiary of the Company, and MPI. Upon the closing of the transaction,agreement, the CAD sharesassets were transferred and assigned to the Company in consideration of the payment by the Company of an aggregatea purchase price of $21$9.4 million $12 million ofin cash, which was payable in cash at closing, with the remainder paid in the form of the Seller Note, which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Share Purchase Agreement. capital.
CADMPI manufactures high end components forand distributes industrial hoses used by the aerospacerecreational boating industry and has one operating location in Phoenix, Arizona. The purchaseCleveland, Ohio. Purchase price was assigned to the book value of the net assets acquired with the excess over the book value assigned to intangible assets and goodwill and has been allocated to the following accounts:
Cash | $ | 790,417 | ||||||
Accounts Receivable | 2,221,635 | $ | 771,088 | |||||
Inventory | 2,098,732 | 2,918,255 | ||||||
Fixed Assets | 10,867,500 | 29,581 | ||||||
Prepaid and Other Assets | 35,264 | 53,397 | ||||||
Intangibles Assets | 3,000,000 | 4,400,000 | ||||||
Goodwill | 7,326,289 | 1,634,108 | ||||||
Total Assets Acquired | $ | 26,339,837 | $ | 9,806,429 | ||||
Accounts Payable | $ | 1,846,247 | $ | - | ||||
Accrued Payroll and related expenses | 224,139 | - | ||||||
Accrued Expense | 518,816 | 406,429 | ||||||
Deferred Income Taxes | 2,750,635 | |||||||
Total Liabilities Assumed | $ | 5,339,837 | $ | 406,429 | ||||
Net Assets Acquired | $ | 21,000,000 | $ | 9,400,000 |
On April 19, 2019, the Company, completed the acquisition of substantially all of the assets of Data Genomix, Inc., an Ohio corporation (“DG”), pursuant to the terms of an Asset Purchase Agreement (the “Asset Purchase Agreement”) entered into by and between Hickok Operating LLC, an Ohio limited liability company and wholly-owned subsidiary of the Company, (“Hickok Operating”), and DG on the date thereof. DG is in the business of developing and commercializing marketing and data analytic technology applications, which applications include, but are not limited to topplr, anglrjobs, anglrlegal and anglrads.
12. DISPOSITIONS
Effective June 1, 2018, the Company completed the sale (the “Sale”) of certain assets comprising its Test and Measurement business segment (the “Test and Measurement Segment”) to Hickok Waekon, LLC, an Ohio limited liability company (“Buyer”), pursuant to an Asset Purchase Agreement (the “Purchase Agreement”) by and among Buyer, the Company, Supreme Electronics Corp., a Mississippi corporation and wholly-owned subsidiary of the Company (“Supreme”), Waekon Corporation, an Ohio corporation and wholly-owned subsidiary of the Company (“Waekon Corporation”), and Robert L. Bauman, who was a director of the Company. Prior to the effectiveness of the Sale, Supreme and Waekon Corporation owned certain of the assets used in the operation of the Test and Measurement Segment and were primarily responsible for the operation thereof.
Upon the closing of the Sale, all of the issued and outstanding shares of capital stock of the Company then-owned, directly or indirectly, by Mr. Bauman or his affiliate, equaling approximately 21,413 shares of Class A Common Stock of the Company and 176,768 shares of Class B Common Stock of the Company, were transferred and assigned to the Company. The shares constituted the consideration received by the Company in the Sale. Based upon the share price at closing, the value of the proceeds received was approximately $1.6 million. The net assets sold were approximately $2.7 million. The Company recorded a loss on sale of approximately $1.2 million in the second quarter of 2018.
13.12. SEGMENT AND RELATED INFORMATION
The Company operates three reportable business segments: (1) Aerospace Components, (2) Commercial Air Handling, (3) and Industrial Hose. The Company operated the Test and Measurement business segment through June 1, 2018, at which time it was sold to Hickok Waekon, LLC. The Company's management evaluates segment performance based primarily on operating income. Certain corporate costs are allocated to the segments and interest expense directly related to financing the acquisition of a business is allocated to that segment, respectively. Intangible assets are allocated to each segment and the related amortization of these assets are recorded in selling, general and administrative expenses.
Aerospace Components:
The Aerospace Components segment was added July 1, 2018, when the Company purchased all of the issued and outstanding shares of capital stock of CAD Enterprises, Inc. (“CAD”) in Phoenix, Arizona. This segment manufactures precision components primarily for customers in the aerospace industry. This segment provides complete end-to-end engineering, machining, grinding, welding, brazing, heat treat and assembly solutions. Utilizing state-of-the-art machining and welding technologies, this segment is an industry leader in providing complex components produced from nickel-based superalloys and stainless steels. Our quality certifications include ISO 9001:2015/AS9100D, as well as Nadcap accreditation for Fluorescent Penetrant Inspection (FPI), Heat Treating/Braze, Non-Conventional Machining EDM, TIG/E-Beam welding.
Commercial Air Handling:
The Commercial Air Handling segment was added June 1, 2017, when the Company purchased certain assets and assumed certain liabilities of Air Enterprises Acquisition LLC in Akron, Ohio. The acquired business, which operates under the name Air Enterprises, is an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions. Its customers are typically in the health care, education, pharmaceutical and industrial manufacturing markets in the United States. This segment also sells to select international markets. The custom air handling units are constructed of non-corrosive aluminum, resulting in sustainable, long-lasting, and energy efficient solutions with life expectancies of 50 years or more. These products are distributed through a network of sales representatives, based on relationships with health care networks, building contractors and engineering firms. The custom air handling equipment is designed, manufactured and installed under the brand names FactoryBilt® and SiteBilt®. FactoryBilt® air handling solutions are designed, fabricated and assembled in a vertically integrated process entirely within the Akron, Ohio facility. SiteBilt® air handling solutions are designed and fabricated in Akron, but are then crated and shipped to the field and assembled on-site.
Industrial Hose:
The Industrial Hose segment was added July 1, 2016, when the Company purchased the assets of the Federal Hose Manufacturing, LLC inof Painesville, Ohio. This business segment includes the manufacture of flexible interlocking metal hoses and the distribution of silicone and hydraulic hoses. Metal hoses are sold primarily to major heavy-duty truck manufacturers and major aftermarket suppliers in North America. Metal hoses are also sold into the agricultural, industrial and petrochemical markets. Silicone hoses are distributed to a number of industries in North America, including agriculture and general industrial markets.
Test and Measurement:
The Test and MeasurementCompany added the distribution of flexible hose for recreational boating to this segment isthrough the legacy business that was started in 1910 whenacquisition of the Company was founded, and was sold June 1, 2018. This business segment included electronic testing products designed and manufactured for the automotive and trucking industries and includes indicators and gauges for the locomotive and aircraft industries. The automotive diagnostic products are sold to original equipment manufacturers and to the aftermarket under several brand names and through a varietyassets of distribution methods. In the aircraft industry, primary customers are manufacturers of commercial, military and personal airplanes. In the locomotive industry, indicators and gauges are sold to manufacturers and servicers of railroad equipment and locomotives.MPI Products on January 2, 2020.
Corporate and Other:
Corporate costs not allocated to the three primary business segments are aggregated with the results of DG, acquired in April 2019.
Information by industry segment is set forth below:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Sales | ||||||||||||||||
Commercial Air Handling | $ | 12,878,988 | $ | 9,876,700 | $ | 39,504,053 | $ | 29,876,961 | ||||||||
Test and Measurement | 29,893 | 790,297 | 532,076 | 2,786,742 | ||||||||||||
Industrial Hose | 1,823,950 | 1,718,138 | 5,554,766 | 5,193,324 | ||||||||||||
Aerospace Components | 7,386,930 | 7,386,002 | 22,864,710 | 7,386,002 | ||||||||||||
Corporate and Other | 124,920 | - | 139,799 | - | ||||||||||||
Total Sales | $ | 22,244,681 | $ | 19,771,137 | $ | 68,595,404 | $ | 45,243,029 | ||||||||
Gross Profit | ||||||||||||||||
Commercial Air Handling | $ | 2,915,767 | $ | 2,743,833 | $ | 9,466,810 | $ | 7,861,725 | ||||||||
Test and Measurement | 4,933 | 130,293 | 87,792 | 722,062 | ||||||||||||
Industrial Hose | 403,158 | 356,000 | 1,521,137 | 1,151,358 | ||||||||||||
Aerospace Components | 1,611,655 | 1,220,096 | 3,907,056 | 1,220,096 | ||||||||||||
Corporate and Other | 52,050 | - | 61,589 | - | ||||||||||||
Total Gross Profit | $ | 4,987,563 | $ | 4,450,222 | $ | 15,044,384 | $ | 10,955,241 | ||||||||
Operating Income | ||||||||||||||||
Commercial Air Handling | $ | 1,509,077 | $ | 1,696,934 | $ | 5,536,745 | $ | 4,357,970 | ||||||||
Test and Measurement | 4,933 | 130,293 | 87,792 | (239,151 | ) | |||||||||||
Industrial Hose | 137,640 | 111,419 | 681,628 | 413,573 | ||||||||||||
Aerospace Components | 1,073,388 | 706,424 | 2,247,461 | 706,424 | ||||||||||||
Corporate and Other | (166,259 | ) | (173,791 | ) | (632,223 | ) | (307,507 | ) | ||||||||
Total Operating Income | $ | 2,558,779 | $ | 2,471,279 | $ | 7,921,403 | $ | 4,931,309 | ||||||||
Income Before Provision for Income Taxes | ||||||||||||||||
Commercial Air Handling | 1,508,944 | 1,686,296 | 5,536,122 | 4,316,875 | ||||||||||||
Test and Measurement | 4,933 | 130,293 | 87,792 | (94,828 | ) | |||||||||||
Industrial Hose | 69,697 | 48,454 | 476,710 | 272,608 | ||||||||||||
Aerospace Components | 830,865 | 620,023 | 1,625,116 | 620,023 | ||||||||||||
Loss on sale of business | - | - | - | (1,160,574 | ) | |||||||||||
Corporate and Other | (177,657 | ) | (397,883 | ) | (678,647 | ) | (842,419 | ) | ||||||||
Income before provision for income taxes | $ | 2,236,782 | $ | 2,087,183 | $ | 7,047,093 | $ | 3,111,685 |
Three Months Ended March 31, 2020 | ||||||||||||||||||||
Commercial Air Handling | Aerospace Components | Industrial Hose | Corporate and Other | Consolidated | ||||||||||||||||
Sales | $ | 11,453,774 | $ | 7,255,826 | $ | 6,249,721 | $ | 322,253 | $ | 25,281,574 | ||||||||||
Gross Profit | 3,047,801 | 1,270,760 | 1,762,367 | 127,215 | 6,208,143 | |||||||||||||||
Operating Income | 1,619,769 | 740,248 | 665,583 | 112,549 | 3,138,149 | |||||||||||||||
Pretax Income | 1,594,804 | 585,928 | 526,526 | 62,109 | 2,769,367 | |||||||||||||||
Net Income | 1,196,102 | 439,446 | 393,470 | 46,552 | 2,075,570 |
Three Months Ended March 31, 2019 | ||||||||||||||||||||
Commercial Air Handling | Aerospace Components | Industrial Hose | Corporate and Other | Consolidated | ||||||||||||||||
Sales | $ | 11,744,561 | $ | 8,020,403 | $ | 1,797,091 | $ | 274,032 | $ | 21,836,087 | ||||||||||
Gross Profit | 3,001,933 | 1,257,006 | 525,735 | 45,214 | 4,829,888 | |||||||||||||||
Operating Income | 1,782,987 | 759,609 | 248,291 | (219,816 | ) | 2,571,071 | ||||||||||||||
Pretax Income | 1,782,696 | 562,956 | 192,479 | (209,259 | ) | 2,328,872 | ||||||||||||||
Net Income | 1,337,022 | 423,718 | 143,073 | (158,355 | ) | 1,745,458 |
13. UNCERTAINTIES
While the recent outbreak of the coronavirus (COVID-19) did not have a material adverse effect on the Company’s reported results for the three months ended March 31, 2020, the Company is actively monitoring the impact of the coronavirus outbreak, which is expected to negatively impact the Company’s business and results of operations for the second quarter and likely beyond. The extent to which the Company’s business and operations will be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact, among other things.
14.14. SUBSEQUENT EVENTS
None.On April 10, 2020, Crawford United Corporation (the “Company”) entered into a promissory note (the “Promissory Note”) with JP Morgan Chase Bank, N.A., which provides for a loan in the amount of $3,679,383 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On May 5, 2020, the Company instructed JPMorgan to repay in full the Promissory Note pursuant to the Paycheck Protection Program under the CARES Act.
RESULTS OF OPERATIONS.
The following discussion is intended to assist in the understanding of the Company's financial position at September 30, 2019March 31, 2020 and December 31, 2018,2019, results of operations for the three and nine months ended September 30,March 31, 2020 and 2019, and 2018, and cash flows for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. 2019. While the recent outbreak of the coronavirus (COVID-19) did not have a material adverse effect on the Company’s reported results for the three months ended March 31, 2020, the Company is actively monitoring the impact of the coronavirus outbreak, which is expected to negatively impact the Company’s business and results of operations for the second quarter and likely beyond. The extent to which the Company’s operations will be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact, among other things.
Items Affecting the Comparability of our Financial Results
Effective June 1, 2018, the Company completed the sale of certain assets comprising its Test and Measurement business segment to Hickok Waekon, LLC, an Ohio limited liability company (“Buyer”).
Effective July 1, 2018,January 2, 2020, the Company completed the acquisition of allcertain assets of the issued and outstanding shares of capital stock of CAD Enterprises,MPI Products, Inc., (“CAD”MPI”). The results of this acquisition are reported under the Aerospace ComponentsIndustrial Hose segment.
Effective April 19, 2019, the Company, completed the acquisition of substantially all of the assets of Data Genomix, Inc., an Ohio corporation (“DG”). DG is in the business of developing and commercializing marketing and data analytic technology applications. The results of this acquisition are reported under the Corporate and Other segment.
Accordingly, in light of the timing of these transactions, the Company’s results for the quarter ended on September 30, 2019March 31, 2020 include the added results of operations of MPI in the Aerospace ComponentsIndustrial Hose segment and operations of DG in the Corporate and Other segment, but not in the Test and Measurement segment. Conversely, our results for the quarter ended September 30, 2018March 31, 2019 do not include operationsthe results of operation of MPI in the Test and MeasurementIndustrial Hose segment but not in the operations ofor DG in the Corporate and Other segment.
Results of Operations – Three Months Ended March 31, 20Months Ended September20 30, 2019 and 20182019
Sales for the quarter ended September 30, 2019March 31, 2020 (“current quarter”) increased to $22.2$25.3 million, an increase of approximately $2.5$3.5 million or 13%16% from sales of $19.7$21.8 million during the same quarter of the prior year. This increase in sales was primarily attributable to organic growth, mainly from the Commercial Air Handling segment.Industrial Hose segment as a result of the acquisition of MPI.
Cost of sales for the current quarter was $17.3$19.1 million compared to $15.3$17.0 million, inan increase of $2.1 million or 12% from the same quarter of the prior year, an increase of $2.0 million or 13%.year. Gross profit was $5.0$6.2 million in the current quarter compared to $4.5$4.8 million, inan increase of $1.4 million from the same quarter of the prior year, an increase of $0.5 million.year. The increase in cost of sales and gross profit was attributable to stronger sales performance in the Commercial Air Handling segment.
There were no product development expenditures during the current quarterIndustrial Hose segment as those expenditures historically were related to the Test and Measurement segment which was divested in June 2018. The company also had no product and development expenditures in the same quartera result of the prior year.acquisition of MPI.
Selling, general and administrative expenses (SG&A) in the current quarter were $2.4$3.1 million, or 11%12% of sales, compared to $2.0$2.3 million, or 10% of sales in the samefirst quarter of last year. Selling, general and administrative expenses increased as a percentage of sales due to the prior year.acquisition of MPI in the Industrial Hose business. The Industrial Hose segment had a higher gross margin, but also higher SG&A expenses increased duecompared to higher selling expenses to support sales growth. SG&A costs are comprisedin the first quarter of sales and administrative salaries, commissions, professional services, intangible asset amortization, and other costs not directly associated with manufacturing of products.2020.
Interest charges in the current quarter were approximately $0.3 million compared to $0.3 million in the same quarter of the prior year. Interest charges increasedThe interest expense stayed the same due to higher weighted average interest rates indebt outstanding during the current quarter as compared to the same quarter of the prior year, and interest charges resulting form the adoption of the lease accounting standard on January 1, 2019. These increases in interest werewhich was directly offset by decreases in interest resulting from lower weighted average debt outstandinginterest rate on bank debt.
Other expense, net was $71 thousand in the current quarter compared to $24 thousand other income, net in the same periodquarter of the prior year.
Other (income) expense, net was comprised of rental income, gains and losses on the disposal of assets, legal settlements, transaction costsacquisition expenditures and other miscellaneous charges. The current quarter has lower other expense compared to the same quarter last year as a result of lower merger and acquisition (M&A) activity.
Income tax expense in the current quarter was $0.5$0.7 million compared to $0.6 million in the same quarter of the prior year. Tax expense in the current period is recorded at the Company’s expected effective tax rate of 25%.
Net income in the current quarter was $1.7$2.1 million or $0.52$0.63 per diluted share as compared to the net income of $1.5$1.7 million or $0.48$0.55 per diluted share for the same quarter of the prior year.
Results of Operations – Nine Months Ended September 30, 2019 and 2018
Sales for the nine months ended September 30, 2019 (“current year”) increased to $68.6 million, an increase of approximately $23.4 million or 52% from sales of $45.2 million during the same period of the prior year. This increase in sales was primarily attributable to results from the Aerospace Components segment acquired on July 1, 2018, as well organic growth, primarily from the Commercial Air Handling segment.
Cost of sales for the current year was $53.5 million compared to $34.3 million in the same period of the prior year, an increase of $19.2 million or 56%. Gross profit was $15.0 million in the current year compared to $11.0 million in the same period of the prior year, an increase of $4 million or 37%. The increase in cost of sales and gross profit was attributable to the addition of the Aerospace Components segment and stronger performance in the Commercial Air Handling segment.
There were no product development expenditures during the current year as those expenditures historically were related to the Test and Measurement segment which was divested in June 2018. The company had $0.2 million of product and development expenditures in the same period of 2018, which were made prior to the divestiture of the Test and Measurement segment.
SG&A expenses for the current year were $7.1 million, or 10% of sales, compared to $5.8 million, or 13% of sales in the same period of last year. SG&A expenses increased due to higher selling expenses to support sales growth, and decreased as a percentage of sales due to the sale of the Test and Measurement segment. SG&A expenses are comprised of sales and administrative salaries, commissions, professional services, intangible asset amortization, and other costs not directly associated with manufacturing of products.
Interest expenses for the current year were approximately $0.9 million compared to $0.5 million in the same period of the prior year. The increase in interest expense was primarily related to the increase in weighted outstanding debt for the current year resulting from the acquisition of the Aerospace Components segment on July 1, 2018, in addition to higher weighted average interest rate in the current year.
There was no loss on the sale of business in the current year, as compared to $1.2 million in the same period of the prior year. The loss on the sale of business is directly related to the sale of certain assets of the Company comprising its Test and Measurement segment on June 1, 2018.
Other (income) expense, net was comprised of rental income, gains and losses on the disposal of assets, legal settlements, transaction costs and other miscellaneous charges. This is primarily related to fewer M&A activities compared to the same period in the prior year.
Income tax expense in the current year was $1.8 million compared to $0.8 million in the same period of the prior year. Tax expense in the current period is recorded at the Company’s expected effective tax rate of 25%.
Net income in the current year was $5.3 million or $1.64 per diluted share as compared to the net income of $2.3 million or $0.71 per diluted share for the same period of the prior year.
Liquidity and Capital Resources
As described further in Note 11 to ourthe Company’s consolidated financial statements, effective July 1, 2018, weJanuary 2, 2020, the Company completed the CADMPI acquisition for an aggregatea purchase price of $21$9.4 million $12 million of which was payable in cash, at closing, with the remainder paid in the form of a subordinated promissory note issued by the Company in favor of a seller, which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses. In connection with that transaction, we amended our credit agreement to, among other things, increase the maximum availability under our revolving credit facility to $12 million, and to increase the amount of our term loan to $6 million. We also amended our promissory notes payable to First Francis to increase the interest rate payable from 4.0% to 6.25%, and to provide First Francis with the right to convert up to $648,000 principal amount of one note into shares of Class B Common shares at a conversion price of $6.48 per share, subject to shareholder approval which was obtained on May 10, 2019. Subsequently, we also amended our outstanding convertible loan with Roundball to provide Roundball with the option to convert, subject to shareholder approval which was obtained on May 10, 2019, a portion of the indebtedness into Class B Common Shares at a conversion price of $1.43 per Class B Common Share, up to a maximum amount of 75,000 Class B Common Shares.
On July 9, 2019, First Francis exercised its option to convert $648,000 of existing indebtedness into 100,000 Class B Common Shares of the Company.capital.
On September 30, 2019, wethe Company amended ourits credit agreement, dated as of June 1, 2017, by and between the Company and JPMorgan Chase Bank, N.A. as lender (as amended, the “Credit Agreement”) to, among other things, increase the maximum availability under our revolving credit facility from $12 million to $20 million, and to extend the maturity of the revolving loan from June 1, 2021 to June 1, 2024. On December 30, 2019, the Company amended its Credit Agreement to remove the borrowing base requirement. Management believes the increase of the revolving credit facility and other modifications to the loan agreement provided additional flexibility to fund acquisitions, working capital and other strategic initiatives.
Total current assets at September 30, 2019March 31, 2020 increased to $26.7$34.1 million from $23.3$27.0 million at December 31, 2018,2019, an increase of $3.4$7.1 million. The increase in current assets is comprised of the following: an increase in accounts receivablecash of $3.3 million,$3.2 million; an increase in inventoriesinventory of $1.6 million$3.3 million; and an increase in costs in excesscontract assets of billings of $0.5$1.8 million, offset by a decrease in cashaccounts receivable of $1.8$1.3 million. Fluctuations in accounts receivable and costs and estimated earnings in excess of billing related to the Commercial Air Handling division are dependent upon progress billing milestones for contracts. The increase in inventory is related to the expansion of our Industrial Hose division through the acquisition of MPI. The Company is carrying higher cash balances due to the uncertainty of future economic conditions directly related to the COVID-19 pandemic.
Total current liabilities at September 30, 2019March 31, 2020 increased to $18.0$19.6 million from $16.9$16.3 million at December 31, 2018,2019, an increase of $1.1$3.3 million. The increase in current liabilities is comprised of the following: an increase of short term notes payable of $1.1 million, an increase in current leases payable of $0.9 million, anthe increase in accounts payable of $1.4 million,$2.6 million; and an increase in accrued expenses of $0.9$1.2 million, offset by a decrease in billingsleases payable of $0.2 million; and a decrease in excess of costs and earningscontract liabilities (included in the unearned revenue item on the balance sheet) of $3.4$0.5 million. The increase in leases payable is related to the adoption of the new lease accounting standard adopted January 1, 2019 as discussed in Note 1 and Note 9 of the notes to the consolidated financial statements. The increase in notes payable reflects required principal payments due in the next twelve months related to the CAD seller note. Fluctuations in billings in excess of costs and earnings related to the Commercial Air Handling division are dependent upon progress billing milestones for contracts.
Cash provided by operating activities infor the current yearthree months ended March 31, 2020 was approximately $0.7$5.8 million, compared to cash providedused by operating activities of $6.3$1.3 million in the same period a year ago. Cash providedused by operating activities for the current yearquarter is comprised of the following: net income of $5.3 million and$2.1 million; adjustments for non-cash items of $1.8 million, offset$0.7 million; and cash provided by cash used for working capital adjustments of $6.3$2.3 million. The primary usesdrivers of increased working capital during the current quarter were the increasedecrease in accounts receivable of $3.3$2.1 million the increase in inventory of $1.6 million, and the decrease in billings in excess of costs and earnings (included in unearned revenue) of $3.4 million, offset by the increase in accounts payable of $1.3$2.3 million. Fluctuations in accounts receivable and costs and estimated earnings in excess of billing related to the Commercial Air Handling division are dependent upon the timing of achievement of progress billing milestones for contracts.
Cash used in investing activities for the current yearthree months ended March 31, 2020 of $0.6$9.5 million, compared to cash used in investing activities of $20.5$0.3 million in the same period a year ago. Cash used in investing activities in the current year was for the purchaseacquisition of DG in April 2019 and capital expendituresMPI in the normal course of business. Cash used in investing activities in the prior year was for the purchase CAD in July 2018Industrial Hose segment and capital expenditures in the normal course of business.
Cash used inprovided by financing activities was approximately $1.9$7.1 million for the current year,three months ended March 31, 2020, compared to cash providedused by financing activities of $15.7$0.7 million in the same period a year ago. Cash usedprovided by financing activities for the current yearquarter was primarily related to: $0.9$10.9 million for payments against notes and $1.0 million for net payments againstborrowings on bank debt. Cash provided by financing activities for the prior year was primarily related to: $9.0 million seller note entered into in connection with the acquisition of CAD and $13.8 million borrowed against bank debt ($12.0 million directly related to the acquisition of CAD). The increases in borrowings wereMPI; offset by the $6.9cash used for $3.1 million repayment againstin payments on bank debtdebt; and the $0.3 million repayments for the$0.7 in payments on notes.
The Company expects positiveis actively managing its business to maintain cash flow from operationsand liquidity. We believe that cash and availability on our revolving credit facility to be sufficient to fund working capital needs and service principal and interest payments due related to the bank debt and notes payable. In addition, theThe Company had $9.2$8.2 million available to borrow on the revolving credit facility at September 30, 2019. SeeMarch 31, 2020. Notwithstanding the Company's expectations, if the Company's operating results decrease as the result of pressures on the business due to, for example, the impact of the COVID-19 pandemic, currency fluctuations, regulatory issues, or the Company's failure to execute its business plans, the Company may require additional financing, or may be unable to comply with its obligations under the credit facility, and its lenders could demand repayment of any amounts outstanding under the Company’s credit facility. As the company cannot predict the duration or scope of the COVID-19 pandemic and its impact on the Company’s customers and suppliers, the negative financial impact to the Company’s results cannot be reasonably estimated, but could be material. In addition, see Note 7 of the notes to the consolidated financial statements.
The Company applied for was approved for a loan in the amount of $3,679,383 (the “PPP Loan”) on April 10, 2020 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On May 5, 2020, the Company instructed JPMorgan to repay in full the Promissory Note pursuant to the Paycheck Protection Program under the CARES Act. See Note 13 of notes to the consolidated financial statements.
Due to the uncertainty of future economic conditions directly related to the COVID-19 pandemic, management has decided to carry higher cash balances and levels of liquidity, rather than focus on debt reduction goals. Management believes the Company has adequate liquidity for debt service, working capital, capital expenditures and other strategic initiatives. However, because the Company cannot predict the duration or scope of the COVID-19 pandemic and its impact on the Company, the pandemic may adversely impact the Company’s available liquidity for debt service, working capital, or cause delay or curtailment of the Company’s planned capital expenditures or other strategic initiatives.
Off-Balance Sheet Arrangements
From time to time, theThe Company enters intohas secured performance and payment bonds in the ordinary courseamount of business. These bonds are secured by certain assets of the Company by the$8.2 million as surety until the Company'son completion of the requirements of thecertain commercial air handling contract. At September 30, 2019, the Company did not have any active surety bonds for which performance and payment not been satisfied.contracts. The Company has no other off-balance sheet arrangements (as defined in Regulation S-K Item 303 paragraph (a)(4)(ii)) that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
The Company’s critical accounting policies are as presented in Notes to Consolidated Financial Statements and Management’s Discuss and Analysis of Financial Condition and Results of Operations in our Annual Report Form 10-K for the year ended December 31, 2018.2019.
Forward-Looking Statements
The foregoing discussion includes forward-looking statements relating to the business of the Company. Generally, these statements can be identified by the use of words such as “guidance,” “outlook,” “believes,” “estimates,” “anticipates,” “expects,” “forecasts,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could,” “would” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements, or other statements made by the Company, are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include:include (a) the Company's ability to effectively integrate acquisitions, including the acquisition of MPI Products, Inc. (dba Marine Products International), and manage the larger operations of the combined businesses, (b) the Company's dependence upon a limited number of customers and the aerospace industry, (c) the highly competitive industriesindustry in which the Company operates, which includes several competitors with greater financial resources and larger sales organizations, (d) the Company's ability to capitalize on market opportunities in certain sectors, (e) the Company's ability to obtain cost effective financing and(f) the Company's ability to satisfy obligations under its financing arrangements, as well as(g) statements related to the expected effects on the Company’s business of the COVID-19 pandemic, (h) the duration and scope of the COVID-19 pandemic and impact on the demand for the Company’s products, (i) actions that governments, businesses and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions, (j) the impact of the pandemic and actions taken in response to the pandemic on global and regional economies and economic activity, (k) the pace of recovery when the COVID-19 pandemic subsides, (l) general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth, and the other risks described from time to time in “Item 1A. Risk Factors” in this Annual Report on Form 10-K and the Company’s reports as filedsubsequent filings with the Securities and Exchange Commission. Except to the extent required by law, the Company does not undertake and specifically declines any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.This item is not applicable to the Company as a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2019,March 31, 2020, an evaluation was performed, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's management, including the Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act") were effective as of September 30, 2019March 31, 2020 to ensure that information required to be disclosed by the Company in reports that it files and submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in the Company's internal control over financial reporting during the quarter ended September 30, 2019March 31, 2020 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Crawford AE LLC (dba Air Enterprises), a wholly owned subsidiary of Crawford United Corporation, was named as a defendant in a lawsuit filed in Superior Court in Quebec, Canada by Carmichael Engineering Ltd. of Quebec (“Carmichael”). Carmichael’s lawsuit seeks payment of invoices for materials and services it allegedly provided to Air Enterprises prior to the Company’s acquisition of Air Enterprises and relating to a third-party cooling system. A trial date has been set for April 2020. The Company believes the claims have been improperly brought against the Company. The Company denies the allegations and will vigorously defend the claims asserted against it. The Company cannot predict the outcome of the above matters or estimate the possible loss or range of loss, if any. Management believes that the allegations are without merit and thatmerit. On March 30, 2020, the ultimateCompany entered into a settlement agreement with Carmichael. The resolution of these matters willthis matter did not have a material adverse effect on the consolidated financial condition, results of operations or cash flow of the Company.
ITEM 1A. RISK FACTORS.
The COVID-19 pandemic has disrupted the company’s operations and could have a material adverse effect on the company’s business.
The Company’s business could be materially and adversely affected by the outbreak of a widespread health epidemic. The present coronavirus (or COVID-19) pandemic has affected the Company’s operations including government authorities imposing mandatory closures, work-from-home orders and social distancing protocols, and imposing other restrictions that could materially adversely affect the Company’s ability to maintain its operations. Specifically, the Company may experience, in the future, temporary facility closures in response to government mandates in certain jurisdictions in which the Company operates and in response to positive diagnoses for COVID-19 in certain facilities for the safety of the Company’s employees. The COVID-19 outbreak could also disrupt the Company’s supply chain and materially adversely impact its ability to secure supplies for its facilities, which could materially adversely affect the Company’s operations. There may also be long-term effects on the Company’s customers in and the economies of affected countries. Even if a virus or other illness does not spread significantly, the perceived risk of infection or health risk may materially adversely affect the Company’s business. Any of the foregoing within the areas in which the company or its customers and suppliers operate would severely disrupt the Company’s operations and could have a material adverse effect on the Company’s business, results of operations, cash flows and financial condition. As the Company cannot predict the duration or scope of the COVID-19 pandemic, the negative financial impact to the Company’s results cannot be reasonably estimated, but could be material.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As previously disclosed in Item 3.02 of the current report, a Form 8-K filed by the Company on July 12, 2019, the Company issued 100,000 Class B common shares on July 9, 2019 to First Francis, a related party, in exchange for the conversion of $648,000 of outstanding notes payable.None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.None
ITEM 6. EXHIBITS
2.1(d) | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. |
31.2 | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. |
32.1 | |
32.2 | |
101.INS* | XBRL Instance |
101.SCH* | XBRL Taxonomy Extension Schema |
101.CAL* | XBRL Taxonomy Extension Calculation |
101.DEF* | XBRL Extension Definition |
101.LAB* | XBRL Taxonomy Extension Labels |
101.PRE* | XBRL Taxonomy Extension Presentation |
*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned as of the 1315th day of November 2019,May 2020, thereunto duly authorized.
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SIGNATURE: | TITLE |
/s/ Brian E. Powers | Chairman, President and Chief |
Brian E. Powers | Executive Officer |
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/s/ Kelly J. Marek | Vice President and Chief Financial |
Kelly J. Marek | Officer (Principal Accounting and Financial Officer) |
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